Hostname: page-component-586b7cd67f-r5fsc Total loading time: 0 Render date: 2024-11-22T05:47:54.739Z Has data issue: false hasContentIssue false
  • English
  • Français

Aging and pension reform: extending the retirement age and human capital formation*

Published online by Cambridge University Press:  08 June 2015

EDGAR VOGEL ,
ALEXANDER LUDWIG  and
AXEL BÖRSCH-SUPAN
EDGAR VOGEL
Affiliation:
Deutsche Bundesbank, Wilhelm-Epstein-Straße 14, 60431 Frankfurt am Main, Germany (e-mail: [email protected])
ALEXANDER LUDWIG
Affiliation:
SAFE, Goethe University Frankfurt, House of Finance, Theodor-W.-Adorno-Platz 3, 60629 Frankfurt am Main, Germany
AXEL BÖRSCH-SUPAN
Affiliation:
Max Planck Institute for Social Law and Social Policy, Munich Center for the Economics of Aging, Amalienstraße 33, 80799 Munich, Germany
Get access Rights & Permissions [Opens in a new window]

Abstract

Projected demographic changes in industrialized and developing countries vary in extent and timing but will reduce the share of the population in working age everywhere. Conventional wisdom suggests that this will increase capital intensity with falling rates of return to capital and increasing wages. This decreases welfare for middle aged asset rich households. This paper takes the perspective of the three demographically oldest European nations – France, Germany and Italy – to address three important adjustment channels to dampen these detrimental effects of aging in these countries: investing abroad, endogenous human capital formation, and increasing the retirement age. Our quantitative finding is that endogenous human capital formation in combination with an increase in the retirement age has strong implications for economic aggregates and welfare, in particular in the open economy. These adjustments reduce the maximum welfare losses of demographic change for households alive in 2010 by about 2.2 percentage points in terms of consumption equivalent variation.

Keywords

C68E17E25J11J24Population aginghuman capitalwelfarepension reformretirement ageopen economy
Type
Articles
Information
Journal of Pension Economics & Finance , Volume 16 , Issue 1 , January 2017 , pp. 81 - 107
Copyright
Copyright © Cambridge University Press 2015 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

*

This research was supported by the U.S. Social Security Administration through grant # 5RRC08098400-03-00 to the National Bureau of Economic Research (NBER) as part of the SSA Retirement Research Consortium. The findings and conclusions expressed are solely those of the authors and do not represent the views of the SSA, any agency of the Federal Government, the NBER, or of the Deutsche Bundesbank. Further financial support by the State of Baden-Württemberg, the State of Bavaria, the German Insurers Association (GDV), and the Research Center SAFE, funded by the State of Hessen initiative for research LOEWE is gratefully acknowledged.

References

Altig, D., Auerbach, A. J., Kotlikoff, L. J., Smetters, K. A., and Walliser, J. (2001) Simulating fundamental tax reform in the United States. American Economic Review, 91(3): 574–594.Google Scholar
Arrazola, M. and de Hevia, J. (2004) More on the estimation of the human capital depreciation rate. Applied Economic Letters, 11: 145–148.CrossRefGoogle Scholar
Attanasio, O., Kitao, S., and Violante, G. L. (2007) Global demographic trends and social security reform. Journal of Monetary Economics, 54(1): 144–198.CrossRefGoogle Scholar
Auerbach, A. J. and Kotlikoff, L. J. (1987) Dynamic Fiscal Policy. Cambridge: Cambridge University Press.Google Scholar
Ben-Porath, Y. (1967) The production of human capital and the life cycle of earnings. Journal of Political Economy, 75(4): 352–365.Google Scholar
Börsch-Supan, A., Härtl, K., and Ludwig, A. (2014) Reforms, international diversification, and behavioral reactions. American Economic Review, 104(5): 224–229.Google Scholar
Bösch-Supan, A., Ludwig, A., and Winter, J. (2006) Ageing, pension reform and capital flows: a multi-country simulation model. Economica, 73: 625–658.CrossRefGoogle Scholar
Browning, M., Hansen, L. P., and Heckman, J. J. (1999) Micro data and general equilibrium models. In Taylor, J. B. and Woodford, M. (eds), Handbook of Macroeconomics, Chapter 8. Amsterdam: Elsevier, pp. 543–633.CrossRefGoogle Scholar
Buiter, W. H. and Kletzer, K. M. (1995) Permanent international productivity growth differentials in an integrated global economy. Scandinavian Journal of Economics, 95(4): 467–493.CrossRefGoogle Scholar
Buyse, T., Heylen, F., and Van de Kerckhove, R. (2012) Pension reform, employment by age, and long-run growth. Journal of Population Economics, 26(2): 769–809.CrossRefGoogle Scholar
de la Croix, D. and Licandro, O. (1999) Life expectancy and endogenous growth. Economics Letters, 65: 255–263.CrossRefGoogle Scholar
de la Croix, D., Pierrard, O., and Sneessens, H. (2013) Aging and pension in general equilibrium: labor market imperfections matter. Journal of Economics Dynamics and Control, 37: 104–124.CrossRefGoogle Scholar
De Nardi, M., İmrohoroğlu, S., and Sargent, T. J. (1999) Projected U.S. demographics and social security. Review of Economic Dynamics, 2(1): 575–615.CrossRefGoogle Scholar
Diamond, P. and Gruber, J. (1999) Social security and retirement in the United States. In Gruber, J. and Wise, D. (eds), Social Security and Retirement Around the World, Chapter 11. Chicago: University of Chicago Press, pp. 437–474.Google Scholar
Domeij, D. and Flodén, M. (2006) Population aging and international capital flows. International Economic Review, 47(3): 1013–1032.CrossRefGoogle Scholar
Echevarría, C. Á. and Iza, A. (2006) Life expectancy, human capital, social security and growth. Journal of Public Economics, 90: 2324–2349.CrossRefGoogle Scholar
Fehr, H., Jokisch, S., and Kotlikoff, L. J. (2005) Will China eat our lunch or take us out for dinner? Simulating the transition paths of the U.S., EU, Japan, and China. NBER Working Paper No. 11668.Google Scholar
Fehr, H., Kindermann, F., and Kallweit, M. (2013) Should pensions be progressive? European Economic Review, 63: 94–116.CrossRefGoogle Scholar
Fitzenberger, B., Hujer, R., MaCurdy, T. E., and Schnabel, R. (2001) Testing for uniform wage trends in west-germany: a cohort analysis using quantile regressions for censored data. Empirical Economics, 23: 41–86.CrossRefGoogle Scholar
Fougère, M. and Mérette, M. (1999) Population ageing and economic growth in seven OECD countries. Economic Modelling, 16: 411–427.Google Scholar
French, E. (2005) The effects of health, wealth, and wages on labor supply and retirement behaviour. Review of Economic Studies, 72: 395–427.Google Scholar
French, E. and Jones, J. (2012) Public pensions and labor supply over the life cycle. International Tax and Public Finance, 19(2): 268–287.Google Scholar
Fuster, L., İmrohoroğlu, A., and İmrohoroğlu, S. (2007) Elimination of social security in a dynastic framework. Review of Economic Studies, 74(1): 113–145.CrossRefGoogle Scholar
Gourieroux, C., Monfort, A., and Renault, E. (1993) Indirect inference. Journal of Applied Econometrics, 8, S85–S118.CrossRefGoogle Scholar
Guvenen, F. and Kuruscu, B. (2009) A quantitative analysis of the evolution of the u.s. wage distribution: 1970–2000. NBER Macroeconomics Annual. NBER. forthcoming.CrossRefGoogle Scholar
Hall, R. (1988) Intertemporal substitution in consumption. Journal of Political Economy, 96(2): 339–357.Google Scholar
Hansen, G. D. (1993) The cyclical and secular behaviour of the labour input: comparing efficiency units and hours worked. Journal of Applied Econometrics, 8(1): 71–80.CrossRefGoogle Scholar
Hanushek, E. A. and Kimko, D. D. (2000) Schooling, labor-force quality, and the growth of nations. American Economic Review, 90(2): 1184–1208.Google Scholar
Heckman, J., Lochner, L., and Taber, C. (1998) Explaining rising wage inequality: explorations with a dynamic general equilibrium model of labor earnings with heterogenous agents. Review of Economic Dynamics, 1: 1–58.CrossRefGoogle Scholar
Heijdra, B. and Reijnders, L. S. M. (2012) Human capital accumulation and the macroeconomy in an ageing society. CESifo Working Paper Series 4046.Google Scholar
Heijdra, B. J. and Romp, W. E. (2009 a) Human capital formation and macroeconomic performance in an ageing small open economy. Journal of Economic Dynamics and Control, 33: 725–744.CrossRefGoogle Scholar
Heijdra, B. J. and Romp, W. E. (2009 b) Retirement, pensions, and ageing. Journal of Public Economics, 93: 586–604.CrossRefGoogle Scholar
Huang, H., İmrohoroğlu, S., and Sargent, T. J. (1997) Two computations to fund social security. Macroeconomic Dynamics, 1(1): 7–44.Google Scholar
Huggett, M., Ventura, G., and Yaron, A. (2012) Sources of lifetime inequality. American Economic Review, 101(7): 2923–54.Google Scholar
Hurd, M. and Rohwedder, S. (2011) Trends in labor force participation: how much is due to changes in pensions? Population Ageing, 4: 81–96.Google Scholar
İmrohoroğlu, A., İmrohoroğlu, S., and Joines, D. H. (1995) A life cycle analysis of social securtiy. Economic Theory, 6: 83–114.Google Scholar
İmrohoroğlu, S. and Kitao, S. (2009) Labor supply elasticity and social security reform. Journal of Public Economics, 93(7–8): 867–878.Google Scholar
Krüger, D. and Ludwig, A. (2007) On the consequences of demographic change for rates of returns to capital, and the distribution of wealth and welfare. Journal of Monetary Economics, 54(1): 49–87.CrossRefGoogle Scholar
Lagakos, D., Moll, B., Porzio, T., and Qian, N. (2012) Experience matters: human capital and development accounting. NBER Working Paper 18602.Google Scholar
Lee, R. D. and Mason, A. (2010) Fertility, human capital, and economic growth over the demographic transition. European Journal of Population, 26(2): 159–182.CrossRefGoogle ScholarPubMed
Liao, P. (2011) Does demographic change matter for growth? European Economic Review, 55(5): 659–677.CrossRefGoogle Scholar
Ludwig, A. (2007) The Gauss–Seidel–Quasi-Newton method: a hybrid algorithm for solving dynamic economic models. Journal of Economic Dynamics and Control, 31(5): 1610–1632.CrossRefGoogle Scholar
Ludwig, A., Schelkle, T., and Vogel, E. (2007) Demographic change, human capital and endogenous growth. MEA Discussion Paper 151-07.CrossRefGoogle Scholar
Ludwig, A., Schelkle, T., and Vogel, E. (2012) Demographic change, human capital and welfare. Review of Economic Dynamics, 15(1): 94–107.CrossRefGoogle Scholar
Maddison, A. (2003) The World Economy: Historical Statistics. Paris: OECD.CrossRefGoogle Scholar
Mastrobuoni, G. (2009) Labor supply effects of the recent social security benefit cuts: empirical estimates using cohort discontinuities. Journal of Public Economics, 93(11–12): 1224–1233.Google Scholar
Oeppen, J. and Vaupel, J. W. (2002) Broken limits to life expectancy. Science, 296(5570): 1029–1031.Google Scholar
Palacios, R. and Pallarés-Miralles, M. (2000) International patterns of pension provision. World Bank Social Protection Discussion Paper Series No. 9.Google Scholar
Prskawetz, A. and Fent, T. (2007) Workforce ageing and the substitution of labor: the role of supply and demand of labour in Austria. Metroeconomica, 58(1): 95–126.Google Scholar
Sadahiro, A. and Shimasawa, M. (2002) The computable overlapping generations model with endogenous growth mechanism. Economic Modelling, 20: 1–24.Google Scholar
Smith, A. A. (1993) Estimating nonlinear time-series models using simulated vector autoregressions. Journal of Applied Econometrics, 8: S63–S84.Google Scholar
Storesletten, K. (2000) Sustaining fiscal policy through immigration. Journal of Political Economy, 108(2): 300–323.Google Scholar
United Nations (2007) World Population Prospects: The 2002 Revision. New York: United Nations Population Division.Google Scholar
Whitehouse, E. R. (2003) The value of pension entitlements: a model of nine oecd countries. OECD Social, Employment and Migration Working Papers No. 9.Google Scholar
Supplementary material: PDF

Vogel supplementary material

Appendix

Download Vogel supplementary material(PDF)
PDF 120.1 KB